Gold is rallying again. The dollar’s not.

You should probably make peace with this trend; it’s going to define our future into the 2020s.

Because now the market plainly sees — as I have been saying since 2012 — that the U.S. economy is a bit like Wile E. Coyote: His jerry-rigged plans to catch his prey never quite work out, because he’s not wily enough to understand that his plans are doomed from the outset. He doesn’t understand his prey.

Thirty-eight thousand jobs. That was the latest Acme anvil to smack the coyote senseless.

It came out of the blue to shock Wall Street, and the Street quickly beat a retreat on what passes for cogent analysis. All the pundits, prognosticators and newsletter commentators who told you with great certainty that the coyote would catch the roadrunner at their June meeting suddenly decided that, nope, the coyote will now miss again. They’ve now decided, based on what the coyote is telling them, that roadrunner is likely on the menu for July.

Once again, they will all be wrong.

All of which means, of course, that gold is where you should be invested today…

Here’s my prediction: If we see an interest-rate increase this year — and that is a very tenuous “if” — December is the earliest month it will happen. And I’m not convinced the Federal Reserve will raise rates until 2017 or even 2018, but more on that in a moment.

The dismal jobs report last week killed any hope of an interest-rate hike when the Fed meets next week for its June confab. Wall Street was expecting 162,000 jobs for May. The economy delivered less than a quarter of that.

The cherry on top: the Bureau of Labor Statistics also revised downward by 59,000 the number of jobs the U.S. economy ginned up in March and April. Here’s how it all shakes out graphically:

Jobs Growth - interest rates

And here’s a look at what the economy has been doing in the last four quarters:

GDP Growth - interest rates

Question: Do those two charts tell the tale of an economy so healthy it’s in need of a rate increase to temper the exuberance?

Those two charts kill any hope of a rate hike in July, despite what some econo types are now saying, and despite the incessant ramblings of certain Fed governors who simply don’t know when to stop crying “Wolf!” (Honestly, the fact that some Fed governors continually prattle about the health of the U.S. economy warranting a rate hike raises questions about the quality of the economics education some of these governors possess.)

The Fed has no business raising interest rates in a jobs market and an economy that are clearly in decline.

And it won’t.

So don’t believe anything you read or hear that says a rate hike is on the table in July. It’s not.

Nor is a rate hike a possibility for the September or November meetings (no meetings in August or October) because those two meetings are much too close to the presidential election, and the Fed has no interest in facing blame for, theoretically, swaying voters.

That means December is the next possibility for the Fed to raise interest rates.

The Long Wait for Higher Interest Rates

Whether the Fed actually does nudge rates higher in December is increasingly meaningless, except for the Fed’s credibility, which has been shot full of holes because the Fed continually tells us a rate hike is coming but then nothing happens.

The investment world is coming round to the view I’ve been espousing since early 2012: The U.S. won’t see meaningfully higher rates for many years, probably not until late this decade or into the 2020s (for reasons I’ve written about here). And we probably won’t see the next rate hike until next year or later because there’s simply too much frailty in Western economies as a result of the overload of debt. Higher rates lead to higher debt payments, which, when you’re already burdened by too much debt, only makes your problems worse.

In fact, there’s a very good chance we see negative interest rates in America before we see anything that resembles normalized rates.

Interest rates are not a function of whether the U.S. adds a bunch of jobs in some given month. And to the degree that they were ever about what number U.S. GDP hangs on the scoreboard, that’s no longer true. Now, they’re about the knock-on effects that higher rates will have here at home and abroad.

Here at home, higher rates will undermine the economy because of all the debt we have at the federal and consumer levels. (And I will come back to you next week to explain just how weak the U.S. consumer really is.)

Abroad, higher rates would rip through the massive mound of dollar-denominated debt spread across emerging markets and lead to a currency crisis, likely in Southeast Asia.

The One Safeguard Against Financial Destruction

And so it is, then, that gold is higher and the dollar weaker in the wake of this latest anvil crushing the coyote’s skull. It’s the market’s reaction to the glacially dawning realization that the 800 words you just read depict the correct analysis. It’s not a popular analysis. It’s not an off-the-cuff, ad hoc analysis based on the latest data point, given that I have been consistently delivering this same message for several years now.

It’s simply the way it is.

Worse, it’s the way it will remain — an anemic, choppy economy and a Fed incapable of normalizing interest rates — until Western governments, led by the U.S., reset the financial system.

And that is going to be an excruciatingly painful process for which you will want a heaping helping of gold in your portfolio to counterbalance the financial destruction that is necessary when very large dislocations are corrected.

Until next time, good trading…
The Danger of the Fed’s Tall Tales - interest rates
Jeff D. Opdyke
Editor, Total Wealth Insider